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Stock Screen: Growth Stocks with Moderate Risk - November 21, 2011
This screen is designed for investors seeking stocks with worthwhile long-term appreciation potential and low-to-moderate risk. Chemicals manufacturer Albemarle Corp. (ALB), packaging outfit MeadWestvaco Corp. (MWV), and Internet titan eBay, Inc. (EBAY) all made the list.
We began by screening for companies where share earnings have compounded at a minimum 15% annual rate over the past five years and that are expected to at least maintain a 10% annual growth rate over the next 3 to 5 years.
Next, we limited the list to stocks with price appreciation potential of 90%, or more, over the next 3 to 5 years, measured from the mid-point of each issue’s Target Price Range. To control for risk, we required that all stocks selected have Safety ranks that are 3 (Average), or better (i.e., 1 or 2). Going one step further, we also required that each company have a Financial Strength rating of B+ (Average), or better. Additionally, minimum standards were set for Price Stability scores. These factors should help select those companies with lower-than-average risk profiles. Finally, to try and guard against near-term underperformance, we required that all stocks be ranked 3 (Average), or better, for Timeliness (i.e., relative price performance in the year ahead). Investors should note that Safety, Financial Strength, Price Stability, and Timeliness are all proprietary ratings and ranks developed by Value Line.
Many growth stocks, including some with better historical and prospective appreciation potential, were eliminated due to their less-than-stellar marks for Financial Strength or their volatile share price movements. We note, however, that the equities included below are likely to provide investors with worthwhile returns over the next 3 to 5 years, reflecting each issue’s prospects for price appreciation during that time frame.
Those wanting to hold less-risky stocks with good prospects may consider some of the choices listed below. As always, we strongly urge investors to consult the individual analyses in Ratings & Reports before committing to any of the issues that appear in this screen.
MeadWestvaco provides packaging solutions to numerous global brands in the healthcare, personal care & beauty, food, beverage, tobacco, and home and garden industries. Operating segments include Packaging Resources, Consumer Solutions, Consumer & Office products, and Specialty Chemicals. Also engages in real estate development and leasing activities. International sales account for 32% of the total. The company owns 755,000 acres of forest land.
MeadWestvaco will likely continue to perform well in the coming quarters. Earnings advanced sharply on a year-over-year basis during the September interim. Management stated that various value-based pricing initiatives, product mix improvement, and accelerating growth in emerging markets will likely keep momentum headed in a positive direction. The company, however, remains cautious regarding consumer demand headwinds in developed countries. Furthermore, potential monetary policy changes in numerous emerging nations dealing with inflation could prove problematic. That said, 3- to 5-year growth potential is solid, given the stock’s moderate risk level.
Albemarle is a manufacturer of chemicals that are used as additives to or intermediates for plastics, polymers and elastomers, agricultural compounds, and pharmaceuticals. The company operates through its Polymer Solutions, Catalysts, and Fine Chemicals segments. Albemarle’s polymer chemicals business produces a wide range of chemicals including flame retardants, polymer curatives, and antioxidants.
Albemarle posted solid increases in sales and earnings for the September quarter relative to last year. Catalyst sales led the way, advancing nearly 40%, to $300 million. Chemical catalysts are used to make reduced-sulfur fuels, which are in high demand reflecting concerns over air pollution. Furthermore, the company was able to maintain its selling price discipline on its bread-and-butter elemental bromine products. Continued strength at the Fine Chemicals unit more than offset relative weakness at the Polymer Solutions segment.
The company has also been returning excess capital to shareholders. The board of directors has granted the company permission to purchase up to five million of its 89 million outstanding shares. Too, the quarterly dividend payout has recently been raised by 6%, to an annualized total of $0.70 a share. For the long haul, we believe that ALB will benefit from an improving global economic backdrop. The product backlog is decent and the company should benefit from its exposure to Asia down the road. Albemarle shares offer solid return prospects, with only an only average risk level.
eBay provides Internet service through which buyers and sellers are brought together in auction and fixed-price formats to buy and sell items such as antiques, collectibles, computers, memorabilia, stamps, and toys. The company operates in two units: Marketplaces and Payments. It had roughly 94.5 million active users at the end of 2010 . eBay’s global payments platform, PayPal, enables secure and quick payments online.
eBay is poised to post strong results in the coming quarters. The PayPal service continues to expand its leading position in global payments. We expect solid near-term gains in active registered accounts, net total payment volume, and revenue for PayPal. This segment should further benefit from increased penetration on eBay as well as continued merchant and consumer adoption. Additionally, the Marketplaces division might well continue to post rising gross merchandise volume, fueled by website improvements, the focus on improving key shopping categories, and increased overseas demand. Long term, we look for mobile commerce to be an increasingly important piece of the puzzle. Business at this up-and-coming segment continues to accelerate, as consumers change the way they shop and pay. The company might well continue to benefit from the steady adoption of its suite of mobile applications that facilitate one-click mobile shopping transactions. Also, eBay plans on entering the point of sale/smartphone payments space, an area that may prove quite lucrative ahead. Management said it is in discussions with certain retailers interested in using its upcoming platform, and that the technology will be designed to work on any device or operating system, doesn’t necessarily have to include near field communications technology, and will be relatively easy to integrate. If successful, we expect profitability to benefit. However, we point out that a number of companies in numerous industries are vying for share of this nascent market including: Google (GOOG), Visa (V), and MasterCard (MA). All in, these shares’ wide price appreciation potential is further enhanced by their below-average risk level.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.